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The Subprime Mortgage Crisis a.k.a. The Great Recession. The Greatest Recession Powerpoint Ever!. What are subprime mortgages?.

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The subprime mortgage crisis a k a the great recession

The Subprime Mortgage Crisisa.k.a. The Great Recession

The Greatest Recession Powerpoint Ever!

What are subprime mortgages
What are subprime mortgages?

  • A subprime mortgage is a type of loan granted to individuals with poor credit histories (typically below 600), who would not be able to qualify for conventional mortgages.

  • Subprime mortgages charge interest rates that are above the typical interest rate because of the risk that is involved on the part of the lender.

  • There are several different types of subprime mortgages, but the most common is the adjustable rate mortgage (ARM).

  • ARMs can be misleading to subprime borrowers because they initially pay a lower interest rate then the rate goes up after some time.

Some statistics of the housing bubble
Some statistics of the housing bubble

  • Between 1997 and 2006, the price of the typical American house increased by 124%

  • The housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.

The subprime mortgage crisis a k a the great recession

And then the bubble burst…

  • "The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system."

    International Monetary Fund, World Economic Outlook, April 2008

The subprime mortgage crisis explained
The Subprime Mortgage Crisis Explained:

  • If a person could not sell their home, this ultimately left the homeowner with one option, and that was to DEFAULT.

  • If the defaulted loan isn’t taken care of in a given amount of time, the bank resumes responsibility of the home and is put up for auction.

  • The bank usually sells the home at a price that is much lower than what it is worth.

  • The process of auctioning off these houses creates a increase in supply of homes in the market, which will decrease the home prices.

The subprime mortgage crisis explained1
The Subprime Mortgage Crisis Explained:

  • One of the major problems that came out of this crisis was that: Billions of dollars were lost in mortgage backed securities.

  • What is a mortgage backed security? “Once a bank has made thousands of mortgage loans, they often package up all the loans together and sell them to investors as bonds.”

  • It was believed that these bonds were very safe investments due to the fact that home prices were on the rise. If an individual was unable to pay the mortgage, it was thought that the homes would easily just be seized and sold.

The aftermath
The Aftermath

  • There was a total of 2.2 million foreclosures in 2007, up 75% from the roughly 1.26 million RealtyTrac reported in 2006. RealtyTrac said 1% of all US households were in 'some stage of foreclosure' in 2007, up from 0.58% in 2006.

  • By the end of 2008, home prices had dropped 20% from their 2006 peak.